Most business owners spend most of their lives building their business to where it is today. The success of the business is likely one of their proudest legacies. But as business owners get older, they may want to start thinking about what happens to the business when they are no longer around.
Planning early with a business succession plan can help ensure that both the business and the legacy lives on. A business succession plan also smooths out any issues with the business owner’s estate plan, making sure their loved ones get a fair value of their share of the business.
One element that business owners should consider in their succession plan is creating a buy-sell agreement.
What is a buy-sell agreement?
First, business partners must calculate:
- The total value of the company; and
- The value of each partner’s share in the company.
Then, business owners can create the buy-sell agreement, which determines how the remaining partners will reassign a partner’s share if they leave the business or pass away. Usually, the agreement states that either the remaining partners or the business as a whole will buy the share.
This helps to smooth the transition if one partner passes away since it helps all business owners prepare.
How do business owners fund a buy-sell agreement?
Most business owners fund buy-sell agreements with life insurance. Business owners can buy insurance policies on each other that cover the cost of a buyout, especially if the buyout occurs because of the death of a business partner. Or, the company can buy insurance policies.
If one partner passes away, life insurance covers the cost of buying that partner out. The partner’s family still receives a fair share of the business value. Meanwhile, the other partners can continue to run the business without a serious financial strain.
Creating a successful business succession plan can help make sure that the company stays alive and healthy after the death of a business partner.
